With neither the Democrats nor the Republican party willing to back down in Washington on the federal debt limit, it looks like the U.S. is heading closer to its first-ever default in the partisan showdown.
According to news on Bloomberg, Chuck Schumer, the Senate Democratic Leader, plans to have another round of votes on the decision passed by the house to suspend the federal government’s debt limits till December 2022. However, his Republican counterpart Mitch McConnell has vowed to block the move for the third time in a row.
In a letter to senators on Monday, Schumer has put pressure to act and lift the debt ceiling limits by the end of the week. Schumer warned that if the senators did not meet the deadline during the week, they have to stay in session during the weekend and work in the planned recess that starts on 11 October and continues for a week.
The rising risk due to political miscalculation and surreptitious congressional operations could push the U.S. to a situation no one in Washington or wall street expects. President Biden’s speech is expected to push Congress into addressing the debt ceiling issue.
Analysts from Barclays Plc say that the consensus among their clients is that the default will not happen. Shawn Golhar, the head of Public Policy Research, Barclays Plc, writes in a note, “The battle lines have hardened as political schisms in Congress looks stronger than they were in a long time.“
The uncertainties are:
- The exact date on which the Treasury department exhausts its cash reserves unless the debt ceiling is suspended or lifted. According to Secretary Janet Yellen, the date is 18 October. However, observers feel that it may stretch for a week or two longer.
- It is to be seen how Democrats seriously rule out using the twisted budgetary process that Republicans are forcing them to use and raise the debt ceiling limit.
- The expiry date when it will no longer be possible for Democrats to implement the budgetary process to save on the default because not enough time is remaining.
Gennadiy Goldberg, a senior U.S. interest rate strategist at T.D. Securities says “The worry has begun. The market will react if there is no clear legislative solution by the end of this week“.
According to analysts from Morgan Stanley, the value of treasury bills maturing at the end of October will decline unless there is a resolution by next weekend. The Treasury bills maturing on 21 October was sold out with a yield climbing up to 8 basis point on fears of potential default.
The brinkmanship between the Democrats and Republic in 2011 during President Obama’s tenure saw the U.S. sovereign credit rating getting downgraded and causing the stock market to slide even when there was no default.
The leaders of both parties are sensing the danger and do not want a default. There is also the option of fail-safe is available in the event of a breakdown. One needs 10 Republican senators to support the democrats and this filibuster that is delaying the debt ceiling legislation. Another way is for all 50 Democrat Senators to unite to create an exception to the filibuster rule so that the bill passes through with a simple majority vote.
According to the Senate Budget Committee Former Republican staff directors Steven Bell and William Hoagland, the budget reconciliation process takes about two weeks to raise the debt ceiling. If the date of 18 October given by Yellen stands, then 4 October was the last date technically for a consensus.
Yellen has, however, said in testimony to a House committee that government will have few extra days after 18 October before cash runs out. Last Thursday, Morgan Stanley projected 28 October as a possible default date. However, the Congressional budget has estimated the default date spilling into early November.
Biden’s Path to Fiscal Doom or Success
It is always tricky to predict precise day-to-day cash flow for governments payments and revenues. This problem was compounded by the pandemic where the economy was impacted, and corona relief packages passed by Congress reflected in the cash flows.
The budget reconciliation process is also cumbersome, and the timeline is not always specific. The process takes months and involves multiple steps from both the Senate and the House. However, this process provides a solution than to bypass a filibuster, the time taken by various debates, amendments to budget resolutions followed by voting.
Former Senate Hoagland, now a Senior Vice president with Bipartisan Policy Centre, was involved in 18 resolutions bypassed by the Congress says that they had never used this process before.
Both House Speakers Nancy Pelosi and Schumer have said that the reconciliation process takes too long and is a nonstarter.
The Senator of Illinois, Dick Durbin, the No 2 leader in the Democratic Party, told reporters that Schumer had pushed the process behind closed doors. It takes around three to four weeks of activity in the Senate and house, including any delaying tactics used by GOP lawmakers.
Since the reconciliation process started in 1981, Steven Bell has analyzed or managed annual budgets since then. He sounded confident that “reconciliation is possible if Schumer can make the senate work throughout the week. McConnell can also help shorten the time frame by a few days even though it requires 50 Republican senators to agree“.
However, McConnell is clear that he has no intention to back down from his demand. He said, “partisan efforts do not work. What works is that majority accept the situation as it is “, he said on the Senate floor last Thursday.
Complication by Impending Holidays
The approaching default dates have raised the high stakes ceiling deadline. There is another problem. It is the week-long recess of Columbus Day starting from 11 October.
Democrats had cooperated and voted with Republican President Trump’s tenure three times to either raise or suspend the debt ceiling. This was despite their opposing the tax cuts by the Republicans in 2017 that added to the debts.
The Barclays team, including Jeffrey Meli and Ajay Rajadhyaksha, has pointed out that they expect the debt ceiling impasse to be resolved before the deadline and most likely through reconciliation.